Stocks rally, USD turns lower on Powell’s speech

Summary:

• Jerome Powell suggests implicitly the Fed could be close to the neutral rate

• Bank of England presents a gloomy outlook if no deal on Brexit is reached

• Australia’s CAPEX for Q3 looks ambiguously

‘Just below’ moves markets

Federal Reserve Chairman Jerome Powell provided fresh fuel for the stock market and pushed the US dollar much lower when he gave a speech at the Economic Club of New York on Wednesday. The key line being widely cited is that Powell sees the current level of interest rates ‘just below’ the neutral range sending a message to markets that the US central bank is slowly coming to an end of monetary tightening in this business cycle. It was not the first time Powell did so as his similar remarks were expressed in earlier weeks. On the other hand, it looks that the Fed is not going to keep on tightening monetary conditions once the financial market stumbles, this could be a contrary word to this voiced by Powell some time ago when he said the major focus is on the real economy. In addition, Fed’s Chairman said that an impact of hikes is uncertain and it might take a year or even more to see it. In terms of the macroeconomic outlook Powell was an optimist saying that he expects solid growth, low unemployment and inflation near the target. When it comes to the stock market Powell said that there is no dangerous excess there. Speaking of estimates of the neutral rate, the concept when rates are at the level that neither accelerates or decelerates inflation, he suggested that these forecasts are highly uncertain. He concluded the speech adding that monetary policy is not an ideal tool to address financial imbalances, though he does not see them on the horizon for the time being.

What is the prime conclusion we may draw? So, it appears the Federal Reserve has decided to strike a more cautious tone before entering the next year. While a next month rate increase seems to be a done deal, markets might become less certain their bets from the beginning of the following year. We view Powell’s comments as a preliminary signal the Fed wants to change financial markets’ perception with regard to the pace of rate rises. This shift may have been made a little while ago given the fact that in October 3 Powell said that “we’re a long way from neutral at this point, probably.” By and large, a bunch of remarks offered by Powell yesterday is consistent with our view regarding the greenback and we expect the US currency to weaken in the mid-term. In terms of a markets’ response to Powell’s appearance Wall Street surged with the NASDAQ (US100) rising virtually 3%, the SP500 (US500) gained 2.3% while the Dow Jones (US30) rose 2.5%. The US10Y yield turned lower in the aftermath losing several basis points and it is trading below 3.02% this morning. A downward move in rates saw the US dollar plunging with the EURUSD being already closed to 1.14, up from 1.1280 before the Powell’s speech.

The SP500 jumped on Wednesday and it neared its resistance in form of the 50DMA. Source: xStation5

Bank of England frightens ‘hard Brexit’ supporters

At the same time when Powell began his speech, the Bank of England released its report concerning a various Brexit scenarios’ impact on the economy. Under the worst assumption the UK economy if forecast to see a 8% GDP decline, a 30% house prices fall, a 48% plunge of commercial property prices, a 25% decrease in the GBP value against the dollar, the unemployment rate jumping to 7.5%, inflation accelerating to 6.5% and the interest rate rising to as high as 5.5% in response to a spike in price growth. These forecasts seem to look a bit ridiculously even when we take into account the worst possible deal for the United Kingdom. However, the aim for this report was clear: frighten policymakers and thereby convince them to vote for the current Brexit deal (December 11). Nevertheless, the ultimate effect could be radically different. For example, Andrew Sentance, the former BoE policymaker, tweeted that the analysis outlined by the BoE is highly speculative and extreme and will add to the view that the Bank is getting unnecessarily involved in politics. The pound fell immediately after the report was released but it was due to Powell.

The BoE forecasts the dismal outlook for the UK economy if no deal is reached. Source: Bloomberg

Australian CAPEX mixed

At the end of the morning analysis let’s touch briefly on the Australian dollar which is trading 0.2% this morning. Namely, we were offered the CAPEX data for the third quarter showing a 0.5% QoQ decrease in private investment spending compared to the consensus of a 1% increase. On the flip side, the 4th estimate of CAPEX spending plans for 2018/2019 turned out to be much more positive producing a value of 114.1 billion AUD compared to 102 billion AUD seen in the 3rd reading. It was also an improvement when we compare to the same period last year. However, it needs to be said that this is another weak data for the third quarter (yesterday we got the data regarding construction work done) boding not well for GDP growth.

Yesterday we wrote about a possibility to see the pair higher. Indeed, this scenario already materialized but bulls might want to continue heading north toward 0.7360 or the upper end of the channel. Source: xStation5

In the other news:

• Japanese retail sales in October rose 3.5% YoY beating the consensus of 2.7%

• UK consumer confidence, the index compiled by YouGov, slumped to the lowest in a year

• Russian President Putin said that oil prices around $60 are absolutely fine